Update

European Regulation

NB: All FOA position papers and responses to consultation papers can be accessed from the FOA web site at www.foa.co.uk/regulation/reform_uk/fsa/index.jsp. Each FOA paper includes an executive summary of key points made in the relevant response. For this reason, these papers are not reproduced in this Update.

	The Commission’s Consultation Paper: Proposals for a Revised Investment Services Directive

Following its submission in response to the above Consultation Paper the FOA briefed Commission officials on the 23 January on a number of issues relating to the proposed inclusion of commodity derivatives within the ISD. These included the application of banking prudential capital rules under the Capital Adequacy Directive (as amended/amplified by the proposed new Basel requirements) to specialist commodity houses; the omission of a dealing “with or through” an authorised person exemption for customers/counterparties; defining the scope of “commodities”; distinguishing between “derivatives” and, for example, “forwards”; and the methodology for determining the nature/quality of a commodity derivative in the context of a “regulated market” test. The FOA intends undertaking work in all these areas over the next three or four weeks.

	The Proposal for a Directive on Market Abuse

(You can refer to the FOA response to the above on the FOA website).

The FOA continues to pursue its concerns with MEPs. It followed up its first round of meetings with MEPs at the end of 2001 (which addressed general concerns, such as the lack of intent as an essential element of the offence and the failure to adequately recognise Chinese Walls) with a further meeting on 23rd January arguing for the misuse of information/insider dealing provisions to be restricted to only those markets where information is required to be disclosed by market rules or normal practice. In briefing MEPs on this issue, the FOA highlighted some of the differences between equity/bond markets and commodity derivatives markets, namely:

a) - there are no "issuers" of commodity derivatives and therefore no uniquely privileged holders of asset-specific information (and, as a result, we are not aware of any disclosure of information rules or obligations under commodity derivative exchange rules or as a result of market practice);
b) - most participants (and/or their agents) will hold relevant asset-specific information which may impact upon the demand, supply and price of the commodity and upon which decisions to trade are based;
c) - users therefore do not expect information asymmetry;
d) the markets in question are essentially wholesale markets in which the underlying product is a raw material and not a regulated investment;
e) - the primary role of such markets is to facilitate risk management or address unexpected changes in the supply or demand of the underlying product;
f) - the current proposals, if not qualified in the way suggested (or in a similar way), will generate greater price volatility and create the potential for increasing consumer prices.

The FOA has since put forward suggested amendments which would deliver a more instrument/market sensitive approach.

	Barriers to Derivatives Business

The Commission is currently seeking further information on specific barriers to cross-border trade within the EU. The FOA circulated a copy of the Commission questionnaire on 2 January which is designed to enable firms to list any barriers encountered by them and feed them directly into the Commission. The deadline for the submission of the questionnaires was 30 January 2002, but it is an ongoing proces. The result is that information on such barriers may be provided to the Commission at any time during the course of negotiations, although the earlier they are provided, the better the opportunity of their being tabled and being subject to meaningful negotiations.

The launch of the new round of international trade negotiations at Doha in November includes liberalisation of trade in financial services. The proposed timetable envisages that countries will submit their requests for removal of/reductions in specific barriers over the course of the next six months (ie until June 2002). WTO members will then table their responses setting out what steps they are prepared to take to remove/reduce any barriers alleged against them by 31 March 2003.

While the WTO negotiations are likely to be very protracted (with some scepticism over the proposed completion date of June 2005), this does represent a key opportunity to lift restrictions on cross-border trading. The role of the private sector in contributing to the negotiations is of vital importance if they are to be meaningful in any practical sense. Firms wishing to raise any barriers may raise them directly with the European Commission or the appropriate national Ministry / Treasury department (or may raise them through any European financial services association, including the FOA).

	CESR’s (Second) Consultation on Harmonised Business Conduct Rules

You can refer to the FOA’s Response to CESR’s (Second) Consultation Paper on the FOA website.

The FOA’s principle concerns can be summarised as follows:

As to the “retail regime”:

- the approach of the second consultation paper represented a major improvement on CESR’s original proposal for harmonising business conduct rules and categorising investors;

- the use of such words (in paragraph 5 of the Introduction) as “understanding” and “cooperation” as an objective of harmonisation, although laudable, fall significantly short of what should be expressed as a key objective, namely, mutual “recognition” of individual member state rules;

- the oversight by competent authorities of firms’ outsourcing policies and procedures should be of key business and customer-facing processes only and should not prevent firms from exercising their commercial discretion in this area;

- it should be more clearly clarified that firms are not prevented from dealing with/for customers which provide incomplete information or information which is not entirely correct, where the firm is aware of any deficiency in the information provided to it, providing it advises the customer that transactions exercised on the customer’s behalf may not be suitable as a result;

- the inappropriateness of importing suitability assessment requirements into “execution only “ relationships (which would also run counter to the customer’s own objectives when establishing such a relationship);

- the onerous nature of the “best execution” rule in requiring every transaction to offer the most favourable conditions in terms of transparency, liquidity and clearing and settlement arrangements etc.

As to the “professional regime”:

- continuing references to investment firms acting in “the best interests of its customers” is entirely contrary to the underlying fundamentals of professional relationships and is deeply mischievous and contrary to CESR’s own express statements that wholesale customers are, for example, “at least sufficiently knowledgeable and prudent to take the initiative and seek additional information and advice where this appears necessary”;

- while strongly supportive of the new “counterparty relationship” category:

- the large corporate size test is set too high;
- eligible counterparties should include also special trading entities, non-EU corporates, local authorities etc.

	CESR’s (Third) Consultation on the Classification of Regulation of Alternative Trading Systems

The FOA has joined with a number of other financial service trade associations in order to address its concerns over the definition of ATSs, and the proposals for regulating transparency and price reporting (also covered in the proposals for revising the Investment Services Directive).

	Barriers to Derivatives Business

The Commission is currently seeking further information on specific barriers to cross-border trade within the EU. The FOA circulated a copy of the Commission questionnaire on 2 January which is designed to enable firms to list any barriers encountered by them and feed them directly into the Commission. The deadline for the submission of the questionnaires was 30 January 2002, but it is an ongoing process with the result that information on such barriers may be provide to the Commission at any time during the course of negotiations, although the earlier they are provided, the better the opportunity of their being tabled and being subject to meaningful negotiations.

The launch of the new round of international trade negotiations at Doha in November includes liberalisation of trade in financial services. The proposed timetable envisages that countries will submit their requests for removal of/reductions in specific barriers over the course of the next six months (ie until June 2002). WTO members will then table their responses setting out what steps they are prepared to remove/reduce any barriers alleged against them by 31 March 2003.

While the WTO negotiations are likely to be very protracted (with some scepticism over the proposed completion date of June 2005), this does represent a key opportunity to lift restrictions on cross-border trading. The role of the private sector in contributing to the negotiations is of vital importance is they are to be meaningful in any practical sense. Firms wishing to raise any barriers may raise them directly with the European Commission or the appropriate national Ministry / Treasury department (or may raise them through any European Financial Services association, including the FOA).